Allocation is Back in Favour With Investors

Investors flock back into allocation funds after months of back-and-forth between equities and fixed income

Sunniva Kolostyak 21 April, 2022 | 9:10AM
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March was a fairly strong month for flows into UK-domiciled funds after a muted start to the year. In total, £1.96 billion was added to UK funds in March, excluding money market funds. By comparison, funds only attracted about £300 million in January and February combined.

Allocation funds are now driving up the numbers. The category had a slow start to the year with outflows of £293 million in February alone, but is now back to inflows of over a billion.

March was the first month since October 2021 that the three largest asset classes all received net inflows simultaneously. In total, allocation saw inflows of £1.16 billion, equity funds attracted £752 million, while £532 million was invested in fixed income funds.

Allocation was the big winner last year. For over 12 months straight, the category attracted inflows around the billion mark, and it now seems investors are ready to continue to pick mixed strategies. Within the broad category, funds with a 60-80% equity allocation attracted £426 million in March, while funds with a 40-60% equity allocation got £339 million.

Morningstar manager research analyst Bhavik Parekh also notes war and geopolitical uncertainty could have led to the Europe ex-UK equity category experiencing its third-highest net withdrawals in three years, with £771 million of outflows during the month. But as we have discussed several times, that's not necessarily a reason to take immediate action yourself. Investors should be careful when considering major changes to a portfolio because of major events like the war in Ukraine.

In February, passive vehicles saw outflows and active ones saw inflows – and this trend continued in March. This is the third consecutive month of outflows for passive strategies, despite a solid performance track record.

Sustainable offerings continue to receive big inflows across categories too. Indeed, the first quarter witnessed the widest gap between sustainable funds' inflows and non-sustainable funds' outflows. Sustainable options have also been popular within the allocation category. Over the first quarter of 2022, sustainable allocation funds saw £1.26 billion in subscriptions while non-sustainable allocation strategies saw £1.12 billion in outflows.

The sector equity ecology category continues to have a large volume of assets shifted into it, and is the top category for inflows in March. State Street's World TPI Climate Transition Index Equity, for instance, saw a £876 million net inflow in a four-day period alone, bringing the fund size up to £1.3 billion. According to Morningstar data, the strategy is now the third-largest in its category, less than a year since inception. Meanwhile, UBS Global Equity Climate Transition attracted £419 million and is now about 12 times its March 2020 size.

Meanwhile, GBP corporate bonds had the biggest outflows, closely followed by the previously-mentioned Europe ex-UK equity category. The largest redemption for the former was from Fidelity Institutional Long Dated Sterling Corporate Bond, with £709 million, but Morningstar’s analysts do highlight that it mirrors an inflow of £707 million into Fidelity-managed LF Access Sterling Investment Grade Credit.

In particular, three Europe-ex-UK equity funds saw outflows. BlackRock European Dynamic with £383 million, Baillie Gifford European with £258 million (representing a 10.9% decrease in fund size), and HSBC European Index with £249 million.

On a fund group level, only four of the ten biggest companies saw net inflows. BlackRock, which usually receives consistent inflows, had net redemptions of £514 million in March. The biggest outflow, however, belonged to Baillie Gifford, which has seen its flows reverse with the change in market leadership from growth to value (we detailed some of this in January). March also marks the fourth consecutive month of net redemptions, and over that period, the company has seen outflows worth £2.8 billion.

Meanwhile, specialist sustainable boutique EdenTree has seen inflows of £569 million, increasing its assets under management by over 30%. Most of this went into EdenTree Responsible and Sustainable Sterling Bond and its Responsible and Sustainable Managed Income funds.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Sunniva Kolostyak  is data journalist for Morningstar.co.uk